The spread between natural gas prices in the United States and Asia has many U.S. producers salivating at the prospect of shipping LNG overseas. Japan, the largest importer of LNG in the world by far, is seen as the biggest prize. The U.S. is not alone – LNG export terminals are under construction around the world, particularly in Australia, the Middle East, and East Africa. By 2018, LNG supplies could double to 600 million tonnes annually. In my last article I looked at why the opportunity for LNG exporters may actually be limited. In this one, I look at an alternative view, prompted by remarks made by the head of LNG trading at ConocoPhillips (NYSE: COP) , as reported by Reuters.

In this version, the final destination for much of the exported U.S. gas could end up being the European market, rather than Asia. As other projects are more strategically timed and located to serve the Asian market (Australia comes to mind), U.S. exporters may not be able to service Asian buyers, at least in substantial volumes. As its competitors reach Asia first, U.S. exporters may send much of their LNG to Europe instead. If that is the case, the U.S. could steal some market share in Europe from Russia, according to Birger Balteskard of ConocoPhillips. This could have positive geopolitical benefits for the U.S. and Europe.

Russia has traditionally been the major supplier of European gas. But it charges high prices, often in the form of long-term contracts linked to the price of oil. And the overwhelming dependence on Russian gas also makes European policymakers nervous from a national security standpoint. Russia has demonstrated its willingness to cut off natural gas supplies to Europe – often in the depths of winter – to achieve some political objective. For these reasons, Europe is often seeking alternative supplies to enhance its energy security. This opens the door to U.S. LNG.

While that is certainly possible, it would still need to make economic sense. The offloading price for LNG in Europe (~$10/MMBtu) is much lower than it is in Asia (~$19/MMBTu). And U.S. natural gas is no longer going for rock bottom prices. It recently surpassed $6/MMBtu, a five-year high. That is likely a temporary phenomenon due to the cold weather, but it also suggests ultra-cheap gas may be a thing of the past. So while it may be difficult for U.S. LNG exporters to sell to Asian markets as Balteskard proposes, with such a small price differential between U.S. and European natural gas prices, it won't be easy to sell to Europe either. And as I mentioned in the last article, opening up the U.S. to LNG trade will necessarily raise prices, further eroding America's advantage. Over the long-term, U.S. prices may be in the $6-$10/MMBtu range, which will make it difficult to beat Russia on price, particularly if Russia drops its prices a bit.

Moreover, it is not as if there won't be more gas alternatives to Europe in the coming years. Other LNG capacity expansions in the Middle East and Africa will also compete against the U.S., not to mention the Trans-Adriatic Pipeline that will carry Caspian gas to Western Europe. Taking all of this into account, I think U.S. LNG exports to Europe will move forward, but in a limited fashion.

Now the one major factor that could upend this theory is LNG demand coming from China. China has not been a major LNG buyer in the past, which is probably the reason it is often overlooked. But with terrible air pollution, China is seeking to increase its consumption of natural gas. If over the next several years China imports LNG at a faster rate than many expect, the market LNG market could be big enough to allow for a lot of newcomers. It seems that Chinese demand for LNG is set to take off – China set a record for LNG imports in January – imports hit 2.65 million metric tons, up 77% from a year earlier. By 2018, China could account for one-fifth of the 272 million ton global LNG market. This is a big unknown variable that U.S. LNG exporters will need to watch.

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